Facing September’s grim deadline, it’s little wonder Loan Charge contractors are on the brink of suicide

As communities around the world begin to emerge from coronavirus lockdown and closer to home, the UK begins to rebuild its economy, it is inevitable that 2020 will go on record as one of the most uncertain, fearful years for generations to come.  

For some contractors, however, there remains an additional sense of dread, as the 2019 Loan Charge amendments in the Finance Bill are entering the final stages of scrutiny, prior to Royal Assent.

Add to this HMRC’s continued pressure to settle, most recently with follow-up calls at the weekends, and the current outlook is for many, understandably, all too much to bear, writes Tom Wallace, director of tax investigations at WTT Consulting.

Looming large: a very real choice

The amendments arise as a result of the Sir Amyas Morse review published in December 2019, which, barring any last-minute objections from MPs, will pass into law as the Finance Act 2020, shortly.

For those affected, this means that they now have a very real and immediate choice to make -- settle their alleged liabilities with HMRC, or take an alternative course, thereby risking the punitive effects of retrospective legislation.

Wednesday September 30th 2020 has therefore become a watershed date in this year’s tax calendar, for this is when HMRC says that you must have finalised settlement to avoid the loan charge -- a charge, I might add, which became due on April 5th 2019. The irony therefore is not lost on me that HMRC will retrospectively disapply the legislation that many feel was retrospective in the first place, or at a minimum, retroactive.

An irrevocable payment on account, dissuading taxpayer access to the judiciary

For contractors that do not settle by that date, HMRC will expect a 2018/19 tax return to either be submitted or amended to reflect the loan charge. Of course, with several groups continuing to challenge HMRC’s view on the underlying tax issues, and with recent generic communications from HMRC suggesting loan charge applicability to taxpayers is no longer affected as a result of the Morse Review, the implementation may not be as simple as HMRC intends.

While the Revenue sees the loan charge as their answer to needing to litigate to prove tax is due from contractors, it must be remembered that paying the loan charge will not close any enquiries. Nor does payment deal with any discovery assessments under appeal. HMRC will continue to pursue all open years and should there be additional liabilities beyond the loan charge, seek payment. Simply put, the loan charge acts as an irrevocable payment on account, to dissuade taxpayers from access to the judiciary. 

Settle on our terms, HMRC is telling exhausted, threatened taxpayers

  Therefore, the injustice felt, is all too real and for several individuals already, too much. This is a policy designed to remove taxpayers’ rights, bring nothing to conclusion and which allows HMRC to recover more tax than even their own stated analysis says it would recoup. Once again, the way out, as highlighted by HMRC repeatedly, to an exhausted, threatened taxpayer population -- settle on our terms.

Inheritance Tax is another issue that continues to confuse and bemuse most in equal measure.  The fact that HMRC claims a tax charge arises on the transfer of earnings to a trust, does not change the fact that the money entered into a trust which made a distribution in the form of a loan. The strange concept of the same money being both earnings and a loan exists in a tax world that looks to label transactions and create a liability as a result of those labels, but which in itself has no power to change the contractual reality of those very same events. 

Double-jeopardy, cruelty and far-reaching consequences

The use of trusts will almost always throw up IHT issues and HMRC will seek to wrap them up within any settlement. It is an element of double-jeopardy that HMRC could remove should they really want -- to encourage settlement without resorting to the loan charge as the catch-all backstop. In fact, for many of our clients, the additional IHT and the risk of continued pressure from HMRC as a result of not including it in settlement, has been a reason not to settle at all.

During a time when contractors are being badly affected by the Covid-19 pandemic, private sector IR35 reform, and end-clients reducing day rates, it seems particularly cruel that the government is pressing forward with a tax policy that has been condemned by over 200 all-party MPs, and further condemned by the House of Lords.

However, given the clear importance around the September deadline, which we do not think will be extended, the decisions those affected make now will have consequences far beyond those that HMRC has taken the time to point out. It would, therefore, be wise to seek professional counsel as to the full implications of your decisions and the individual nuances of your case.